A HEALTHY growth in core income and lower deposit expenses provided some much-needed relief to Allied Bank Ltd’s bottom line for the half year ending June 30.

However, the twin impact of the recent changes in the taxation structure and the low interest rate scenario led to an expected drop in second quarter earnings.

Still, the higher interest income and lower core expenses allowed the bank’s unconsolidated after-tax profit for the six-month period (1HCY15) to rise 3.4pc to Rs7.36bn. Its earnings-per-share translated into Rs6.42, up from last year’s Rs6.2. The bank announced a dividend of Rs1.75 per share for the period.

As the bank booked the one-time 4pc super tax introduced in the FY16 budget, its overall tax bill for 1HCY15 shot up to Rs6.2bn from Rs3.7bn last year

Yet, as it booked the one-time 4pc super tax introduced in the FY16 budget, its overall tax bill for 1HCY15 shot up to Rs6.2bn from Rs3.7bn in 1HCY14. Since the tax amount (Rs1.46bn) was booked in the second quarter, the bank’s profit-after-tax for the three months ending June dropped 18.5pc over the previous quarter to Rs3.15bn.

“The steep drop in second quarter earnings is explained by the one-off super tax of Rs1bn imposed and additional tax provisioning of Rs0.5bn on account of changes in the tax rate for capital gains and dividend income. The additional taxes account for a Rs1.28 per share impact in 2Q only,” wrote Kasb Securities analyst Mohammad Fawad Khan in a research note last week.

Investments: The bank’s net investments went up around 10pc to Rs455.3bn during the period, forming a 49.6pc share in the total asset base of Rs917.9bn.

Like its peers, ABL relied on its huge holdings of Pakistan Investment Bonds (PIBs) for the bulk of its interest income. And it continued to actively bid for fresh PIBs issued during 1HCY15, as its total PIB portfolio expanded by a sizable 20.8pc and reached Rs319bn by end-June.

“ABL [like a few others] has maintained a rather conservative approach when it comes to its asset mix. While scheduled banks’ total PIB holdings rose by around 12pc during January-June, ABL’s rose by 20pc, suggesting that it was fairly active during the bond auctions,” said one sector watcher.

A further analysis of the bank’s financial statements shows that it is continuously adding PIBs into its available for sale (AFS) portfolio; the bonds in this category grew from Rs72.4bn at end-2014 to Rs110.5bn by March 31 and then to Rs132.6bn by June 30.

The amount of PIBs in the held-to-maturity portfolio (HTM) remained largely unchanged at around Rs185bn, while those in the held-for-trading (HFT) category grew from Rs2.5bn to Rs12.5bn. Given the drop in interest rates and the corresponding rise in bond prices during the period, the higher PIBs in the HFT portfolio likely contributed to the Rs8.17m in unrealised gains on the bank’s profit and loss account for 1HCY15.

The bank earnings from the HTM portfolio almost doubled to Rs11.35bn during the period. Conversely, its income from advances dipped to Rs13.9bn, in line with the lower prevalent lending rates as well as the drop in its loan book.

ABL’s overall interest income clocked in at Rs36.4bn for 1HCY15, up 14.5pc from last year.

“The bank has said it will be venturing towards more SME and private sector lending, while continuing to rely on PIBs for its core income,” commented Taurus Securities analyst Usman Riaz.

While the bank’s directors have yet to release their report for the six-month period, its then-CEO Tariq Mahmood had written in the first quarter report that “strategic priorities towards steady growth in performance would be driven by optimum utilisation of multiple delivery channels [and] continuously improving the quality of assets. The bank remains committed towards diversifying revenue streams through focusing on gradual growth in Islamic banking, branchless banking and fee-based income opportunities”.

Deposits: On the other hand, a major reason behind the bank’s flattish interest expenses appears to be its efforts to shore up current accounts. During 1HCY15, non-remunerative current account deposits recorded the highest growth of 16.7pc and reached Rs238.6bn. Savings deposits went up by a much lower 5pc to Rs178.7bn, which high-cost fixed deposits dropped 3.2pc to over Rs177bn during the period.

As a result, the bank’s ratio of current and savings accounts (Casa) to total deposits increased from 73pc to 75pc, said Riaz.

This composition, coupled with the cycle of monetary easing that has led to a drop in the minimum deposit rate on savings accounts, helped the bank reduce its deposit expenses to Rs13.7bn from Rs14.8bn last year.

This, in turn, helped its net interest income rise a solid 35.2pc to around Rs17.4bn for 1HCY15.

The bank’s deposit mobilisation efforts have also been aided by its aggressive expansion strategy, which has seen it add around 110 branches in around two-and-a-half years. Its current network comprises 998 outlets.

Non-interest income: After realising sizable capital gains (Rs1.65bn) last year, ABL recorded Rs416.6m as income under this head in 1HCY15. This dragged down its overall non-interest income by 8pc to Rs5.7bn for the period.

Islamic banking: A relatively new entrant into the Shariah-compliant banking space, ABL had over Rs2.7bn in assets in this segment by end-June, up significantly from just Rs0.9bn at end-2014. Its Islamic banking deposits also grew to Rs1.48bn from Rs382m during the period.

Yet, the segment posted a loss of over Rs17.9m for 1HCY15, against a profit of Rs44.2m in 1HCY14. This was the result of an inexplicable Rs15.7m loss on sale of securities, which wiped out its net income of Rs15.5m for the period.

Published in Dawn, Economic & Business, August 10th, 2015

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